Bond Market Weekly Commentary - 14 Nov 2008

Technorati Tags : Malaysia bond market, industrial production, 5 year MGS auction

Following last week’s rally, the local bond market continued its sterling performance to close stronger for the week. Gains in US Treasuries and weaker than expected September industrial production data were among the catalysts that led to a much flatter curve for the week. Sentiment was also driven by lower interest rate expectation as speculation of a rate cut in the upcoming MPC intensified.

Out in the news, Industrial Production fell 1.7% in September from a year ago, the first decline in 18 months, and a sharp drop from the 1.2% expansion in August. This was much worse than market expectations for a 0.6% increase. The surprise fall in September IP, especially electronics, suggest a sharp slowdown in 3Q08 GDP growth, likely close to 4-4.5% range or even below, reinforcing the notion that the global recession has finally caught up with Malaysia and increasing the likelihood of a rate cut in the upcoming MPC.

Government Securities

The focus in the MGS market was on the auction of the 5.4 year MN04/14. Prior to the auction, the When Issued was traded in a range of 3.90%-3.76%. The RM3 billion auction received a bid to cover ratio of 1.8 times and was issued at an average rate of 3.751% with the high and low seen at 3.78% and 3.697% respectively. Post auction, the stock was traded lower and close at 3.72%, 16bps lower from last week’s level. In tandem with the good response in the auction, the rest of the curves were traded lower for the week albeit in thin volume. Average daily turnover fell to RM1.3 billion compared to RM1.9 billion reported last week, with interest skewed towards the shorter end of the curve. The 3-year MN09/11 fell 11bps lower to 3.58% while the 10-year MS02/18 closed 3bps lower to 4.10%. The 20-year MS09/28 was lightly traded and closed 5bps lower to 4.58%. In the bills market, the 1-2 month bills fell to a 3-month low of 3.30% on the back of aggressive buying by local interbank players.

In terms of sovereign spreads, the 3/5s narrowed by 5bps to 14bps while the 5/10s widened by 13bps to 38bps. The 10/20s fell by 2bps to 48bps.

The Week Ahead

We expect the market to be traded range bound ahead of the MPC meeting. Focus will also be on the October CPI due to be released on Friday.

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Bond Market Weekly Commentary - 7 Nov 2008

Technorati Tags : Malaysia bond market, interest rate cut, 5 year MGS auction

After last week’s sell-offs, buying flows were back into the local bond market. The week started on cautious note as players stayed sideline ahead of the announcement of the revised economic forecasts and financial contingency stabilization plan on Tuesday. The Government lowered its GDP forecast for 2008 to 5% from 5.7% while the 2009 growth forecast was also cut to 3.5% from 5.4%. The 2009 deficit number was revised upward to 4.8% of GDP from 3.6%. The market was well bid thereon. Although the higher deficit could result in more bond issuance, thus, increasing the oversupply risk, the market seemed to be more concerned on the slower growth outlook, which increased the probability of a rate cut in the next MPC. Another highlight of the week was on the announcement of the 5-yar MGS auction. The RM3 billion issue was well within market expectation and the good response in the When Issue market has led to aggressive buying across the benchmark curves and ensured a strong finish for the week.

Government Securities

The bond market was buoyed by positive news during the week. The downward revision of 2009 growth and the absence of foreign funds selling were seen as the main factor that led to much flatter curve for the week. Average daily turnover fell to RM1.9 billion compared to RM2.8 billion reported last week. Details of the upcoming 5-year MGS auction were announced on Friday. The When Issued for the RM3 billion issue was last traded at 3.88%, 28bps lower than last week’s level for the existing 5-year benchmark. The bullish sentiment in the WI was followed by aggressive buying from the local players on other benchmarks. The 3-year MN09/11 closed 14bps lower to 3.69%. At the longer end of the curve, both the 10-year MS02/18 and 20-year MX09/28 closed lower by 17bps and 22bps to 4.13% and 4.63% respectively.

In terms of sovereign spreads, the 3/5s narrowed by 14bps to 19bps while the 5/10s widened by 11bps to 25bps. The 10/20s fell by 5bps to 50bps.

The Week Ahead

Increased expectation of a rate cut in the next MPC shall see the bullish sentiment in the bond market to remain. The market will also be focusing on the 5-year MGS auction this week.

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